Simon Jonson has suggested that (ultra liberal inflationist and debt multiplier) Paul Krugman be made Fed Chairman – instead of the bankster Bernanke.  Bernanke definitely needs to go …but to replace him with Krugman?  Simon Johnson has gone nuts and his sidekick Kwak has such a liberal political bias that it gets in the way of economic common sense.  Even Krugman says it’s a crazy idea. The guy just fell several notches in credibility advocating that sort of dribble…

Simon Johnson has a good analysis of the administration’s so-called regulatory reform:

Writing in the New York Times today, Joe Nocera sums up, “If Mr. Obama hopes to create a regulatory environment that stands for another six decades, he is going to have to do what Roosevelt did once upon a time. He is going to have make some bankers mad.”

Good point – but Nocera is thinking about the wrong Roosevelt (FDR).  In order to get to the point where you can reform like FDR, you first have to break the political power of the big banks, and that requires substantially reducing their economic power - the moment calls more for Teddy Roosevelt-type trustbusting, and it appears that is exactly what we will not get.

Interstate banking should have never been allowed.  The issue is an old one, but still real.  If that had been stopped, it would have prevented concentration in too big to fail banks. The best reform is to go back to what had been proven to work over about 60 years.  We need to break those big banks up and restrict their territories, geographically and with respect to business lines. But as Dr. Johnson says:

The reform process appears to be have been captured at an early stage – by design the lobbyists were let into the executive branch’s working, so we don’t even get to have a transparent debate or to hear specious arguments about why we really need big banks.

Simon Johnson comments of Geithner and Summer’s 5 point plan to form A New Financial Foundation:

And of course the complete omissions from this document are breathtaking.  No mention of executive compensation or the structure of compenstion within the financial sector.  Not even a hint that the complete breakdown of corporate governance at major banks contributed to execessive risk taking.  And no notion of regulatory capture-by-crazy-ideas of any kind.

Overall, there are no surprises here.  Brick by brick, we are building the foundation for the next financial crisis; by all indications, it will be more disruptive and a great deal more damaging than the crisis of 2008-09.  But presumably by then the authors will be out of office.

No change you can believe in here:  the “new financial foundation” is the same shifting sand as the old one.  Every time those guys open their mouths, they make it more clear they are in the pocket of the big banks and just want to get their man reelected whatever the cost to the people of the United States…

Ben Bernanke on Tuesday again warned that without improvement in the banking sector there can be no recovery.  Martin Wolfe in FT today, although arguing that the US has not yet become the new Russia, tends to agree with Simon Johnson that the bank oligarchy in the US must be broken up in order for the banking sector to improve and the economy to recover (we added the emphasis).

“[Prof. Johnson] argues that the refusal of powerful institutions to admit losses – aided and abetted by a government in thrall to the “money-changers” – may make it impossible to escape from the crisis. Moreover, since the US enjoys the privilege of being able to borrow in its own currency it is far easier for it than for mere emerging economies to paper over cracks, turning crisis into long-term economic malaise. So we have witnessed a series of improvisations or “deals” whose underlying aim is to rescue as much of the financial system as possible in as generous a way as policymakers think they can get away with.

I agree with the critique of the policies adopted so far. In the debate on the Financial Times’s economists’ forum on Treasury secretary Tim Geithner’s “public/private investment partnership”, the critics are right: if it works, it is because it is a non-transparent way of transferring taxpayer wealth to banks. But it is unlikely to fill the capital hole that the markets are, at present, ignoring, as Michael Pomerleano argues. Nor am I persuaded that the “stress tests” of bank capital under way will lead to action that fills the capital hole…

Yet decisive restructuring is indeed necessary. This is not because returning the economy to the debt-fuelled growth of recent years is either feasible or desirable. But two things must be achieved: first, the core financial institutions must become credibly solvent; and, second, no profit-seeking private institution can remain too big to fail. That is not capitalism, but socialism. That is one of the points on which the right and the left agree. They are right. Bankruptcy – and so losses for unsecured creditors – must be a part of any durable solution. Without that change, the resolution of this crisis can only be the harbinger of the next.”

We agree. But will the administration and congress forego the political contribution flow from the big banks to accomplish this necessity? It does not now seem likely. The socialism of too big to fail seems to be preferred by the powers that be – on both principle and political expediency.

WSJ reports that the Treasury has committed to give TARP funds to several Life Insurance companies:

“The life-insurance industry is an important piece of the U.S. financial system. Millions of Americans have entrusted their families’ financial safety to these companies, so keeping them on solid footing is crucial to maintaining confidence. If massive numbers of customers sought to redeem their policies, it could cause a cash crunch for some companies. And because insurers invest the premiums they receive from customers into bonds, real estate and other investments, they are major holders of securities. If they needed to sell off holdings to raise cash, it could cause markets to tumble.”

“Life insurers had for a time seemed to be somewhat immune from the credit crisis, since they tend to invest in relatively safe assets in order to match their liabilities. These companies got into trouble for two main reasons, both tied to the weak financial markets.

First, many of the roughly two dozen insurers that dominate the variable-annuity business made aggressive promises on these popular retirement-income products, guaranteeing minimum returns, no matter what happened to the stock market. With the market’s decline, the issuers are on the hook for big payouts, though most of the payments won’t come due for 10 or more years. Second, the insurers also have lost money on the investments in bonds and real estate that back their policies.”

Pre-market prices of many Life companies are up this morning.  It seems sad that stock prices react positively to news that more companies need federal bailouts.  The Insurance companies will now be subject to the same (uncertain) executive pay restrictions and other possible political whim as banks who take TARP money. The oligarchy’s control written about by Simon Johnson is expanding…

It’s perhaps not surprising, but notice that the new flexibility of the Life companies to value their asset prices according to “mark to fantasy” is not forestalling the need for real cash.

Simon Johnson, who was formerly with the  IMF and who founded the Baseline scenario site has a great article in the  The Altantic about how the bankers oligopoly have staged a “quiet coup”, bringing the US government under their thumb since World War II and the urgent need to put them in their proper place before we spin off into depression. Hat tip, ZeroHedge. Here are a couple of quotes:

“The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.”


“The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.”